5 key fundraising thoughts

One of the more popular questions we are asked at Ignitor, particularly by early stage entrepreneurs during our weekend bootcamps is about funding. The most common of these questions include “How do I access funding?”, “How do I build my business without funding?” and the ubiquitous, “I just need to get some funding and then I will build my business (or my product).”

Being Lean proponents, we typically tell these startups that there is a multitude of activities that they can perform in order to bootstrap their business growth and test their businesses or product’s demand prior to even thinking about searching for funding.

If still faced with a lack of enthusiasm with regard to this explanation we get quantitative and inform them that only twenty per cent of the Inc. 500, the five hundred fastest-growing US based private companies, raised outside funding.

And if there are still unbelievers, we point them to Paul Graham, founder of the largest and most successful startup incubator of all time, Y-Combinator, who says that startups should aim to become “ramen profitable” (http://www.paulgraham.com/ramenprofitable.html) This entails not raising too much funding (or no funding at all) spending almost no cash and making enough from the business to afford ramen noodles for dinner.

However, in the interests of satisfying the most curious of entrepreneurs, we’ve put our 5 key thoughts down with regard to funding:

1: Establish whether you need funding

To decide if you need to raise funding you need to answer the question about whether your business can make it to profitability without raising funding. To do this, calculate your breakeven point and estimate the time to breakeven. If your numbers show that you need to raise money, review alternative go-to-market strategies, such as a consulting project on the side or a model where one founder works while the other builds the business. Another alternative would be to create a minimum viable product (MVP) that can get you to break even quickly.

2: Think about whether you can actually raise funding at all

Statistically very few startups raise funding from angel investors or venture capital. Less than 3% of companies that try to raise money actually raise funding. This means that it is a waste of time for most companies. As a result, it is best to only try and raise money if you have a strong track record or high level of expertise in a specific domain, have a product in the market and most key assumptions of the business have been validated or, finally, you have a strong relationship with a potential investor (i.e. a rich uncle).

3: Get to know what questions investors will ask you

Investors are very good at quickly assessing the positives and negatives about a business and asking key, probing questions about the business model. Should an entrepreneur find themselves in front of an investor, it’s critical that they understand what information investors find important. In our experience, this typically includes the following:

  • They require an understanding of the business’s current financial state and revenue model.
  • They require an understanding of the business’s future revenue projections.
  • They may explore what patents, trademarks and domain names are held by the business. This intellectual property can differentiate a business from its competitors.
  • They’d like to know where in the funding process the business is and how much money the business is looking to raise in the current funding round.
  • It will be of critical importance for them to clearly understand what the unique value proposition is with regard to the business’s products or services.
  • They want a thorough explanation of the current risks that the business is facing.
  • They want to know what traction has been made and that the business is behaving like a lean and mean startup, not like a large, slow moving corporate.
  • They love to understand what competition exists in the marketplace.

4: Understand what funding options are available

An entrepreneur needs to determine the best avenue of funding for their business. Not all funding options are suitable for all businesses. Some may be too expensive in terms of both debt and equity and there are many that a particular business will simply not qualify for.

So, spend some time carefully researching the offerings available within South Africa and the benefits and disadvantages of each one. This could include looking at government grants, crowdfunding sites, Development Financing Institutions (DFIs), Enterprise and Supplier Development firms (ESDs), angel investors, banks, venture capitalists and what corporate CSI funds are available.

5: Do your due diligence

No matter which funding option you end up choosing, you should perform careful due diligence prior to engaging. Investors, angels and institutions should be researched online. You need to determine if they can be trusted and what sort of track records they have created.

Reference checks and interview references will help to establish what the investors or institutions strengths and weaknesses are and what value they can add to your business.

Remember, it’s all about identifying the red flags and avoiding the big funding pitfalls.

If you would like to ask Ignitor about our bootcamps and accelerator programmes, please visit the following page: http://www.ignitor.co.za/contact

5 key fundraising thoughts

The 5 common mistakes SA entrepreneurs make when applying lean startup

The lean startup has changed the way new companies are being launched. It is a methodology that has been used by the likes of Dropbox, Airbnb and Uber. SpaceX and Google have used it to disrupt industries and large companies like Intuit and General Electric have adopted the approach to get new products to market faster with higher success rates.

In addition, a number of studies have shown that it is one of the best ways to improve a new businesses odds of success. For example, research done by the Startup Genome project showed high growth companies that apply lean startup have been shown to grow 20 times faster than those that don’t. Another study done by the National Science Foundation in the US found companies that apply lean are 300% more likely to raise funding.

As a result, we at Ignitor (a startup accelerator) have over the course of 3-years helped over 500 entrepreneurs apply lean startup to their businesses.

The methodology surmises that companies who are launching products or new businesses will be more successful in reducing market risks by testing and validating their ideas and assumptions in small iterations. Learnings are then applied to the succeeding tests. In addition, the startups are tasked with finding early adopter customers and then try to ensure that the developed product or business specifically meets those early adopter needs. Lean is fast becoming the standard methodology of choice for many entrepreneurs that are attempting to build a startup.

At Ignitor, we have seen many talented entrepreneurs apply the Lean methodology thereby building successful and revenue generating businesses. However, we have also seen many entrepreneurs apply the methodology incorrectly. Here are the 5 biggest mistakes companies make when applying lean.

Mistake 1: Treating lean as a once-off event

Many entrepreneurs initially buy-in to the principle of identifying customers, finding early adopters and establishing key customer problems before building the product. Initially, as many as 30 customers could be interviewed to inform the development of the product.

Many of the entrepreneurs we have worked with have initially done some customer interviews, but then stop interacting with their customers as they develop and build the product. The result, is when they launch the product tends to get a “blah” reaction from customers.

A quick question to test if you are really engaging with your customers is: are you talking with 5 to 20 customers every week?  During these meetings you should be using customer behaviour to inform product development.  

Mistake 2:  Not pre-selling their product

The second, big mistake we see founders making when applying lean is that they don’t pre-sell their product. The most common behaviour is to ask customers what they think of their product. This usually gets a very positive response.

However, there is little relationship between customers saying they like a product and them becoming a customer. Hence, the need to pre-sell. Pre-selling does not always mean you need to collect cash, but customers should have to give some form of currency, such as, making them take some action without social pressure. Customers should also exhibit certain behaviours such as being engaged and asking questions that any serious buyer would. Entrepreneurs need to understand the difference between what customers “say” and what they “do”.

Mistake 3: Doing “fake work”

Nearly all great startups do two things well. They attract customers and they deliver a great product. The key idea of the lean startup is to find out what is the best way to attract customers and to find out how to build a product that customers will love. Successful startups also get customer feedback, improve the product continuously and increase resources to deliver a great product.

The key progress metric is are getting better at finding and attracting customers. This means founders should focus on talking to customers, arranging customer meetings, testing new ways to get customers and marketing to them.

Many of the startups we have worked with avoid the difficult work of finding a repeatable and scalable way to find customers, but rather focus on performing  “fake” work such as writing business plans, entering competitions, seeking undirected publicity, taking random meetings, speaking at conferences, participating in long discussions and “strategy” talks, planning years ahead, exploring strategic partnerships and managing email fulltime, thereby neglecting getting to customers and improving their product.

Mistake 4: Maximum Viable Product

A minimum viable product is a product you can quickly create that will test if customers want what you are making. They idea it to be able to create a minimum viable product in a few days or weeks.  

Many of the companies we have worked with make the mistake of being fixated on the final version of the product and don’t create a simpler version first. As Reid Hoffman, the founder of Linkedin says, “If you are not embarrassed by the first version of your product, you have launched too late”.

A simple test to see if there is a high chance you are building a maximum viable product is ask the question: is my product it taking longer than 2 months (ideally 2 weeks) to get into the customer’s hands? If so,  there is a high likelihood that you are not building a minimum viable product.  

Mistake 5: Not targeting early adopters

The final mistake we see many of the companies that we work with make is not focusing on a single customer segment, but rather trying to target a whole market at the same time. This unfortunately, results in unfocused efforts, little traction and often limited mindshare in the different customer segments.

A simple question to ask if you are really focusing on an early adopter market is: are you piloting your product with 10 (in the case of B-to-B) or 100 (in the case of B-to-C) near identical customers? If you are not, you are probably trying to target too many customer segments at once.   

If you are interested in finding out more about the Ignitor program or would like to learn how to apply lean startup to your business, visit us at: www.ignitor.co.za

The 5 common mistakes SA entrepreneurs make when applying lean startup